Title of Module : INTERMEDIATE ACCOUNTING 3

Topic : I. Property, Plant and Equipment

LEARNING OBJECTIVES
1. Define property, plant and equipment and its’ characteristics
2. Recognition and derecognition of property, plant and equipment
3. Measurement of property, plant and equipment.

DEFINITION OF TERMS
Accumulated Depreciation
The cumulative depreciation of an asset up to a single point in its life. A contra-asset
account.

Depreciation
The process of allocating the cost of long-lived plant assets other than land to expense
over the asset’s estimated useful life. It is recorded to tie the cost of using a long-term
capital asset with the benefit gained form its use over time.

Depreciable amount
Asset’s total cost minus the asset’s expected salvage value or simply the cost of
operating asset other than land subject to depreciation.

Depreciation Period / Useful life

An estimate of the productive life of an asset usually expressed in years and may also
be based on units of activity or production.

Derecognition
The removal of all or part of a recognized asset or liability from the statement of
financial position.

Fair Value
For an asset, the price that would be received to sell an asset in orderly transaction
between market participants at measurement date.

Net Book Value

Also referred to as Carrying Amount, an asset’s total cost minus the accumulated
depreciation assigned to the asset or simply the cost of an asset that has not been
allocated to expense.

Operating Assets
Long-lived assets that are used in normal business operations and are not held for
resale to customers.

Property, Plant and Equipment (PPE)

Tangible operating assets that require periodic repair and replacements. Also referred
to as plant assets or fixed assets.

Recognition
The process of capturing for inclusion in the financial statements an item that meets
the definition of an asset, liability, equity, income or expense.
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Residual Value

CFAS MODULE BY ECP | Finals Part I

Also known as salvage value, scrap value, disposal value. The net amount obtainable at
the end of the asset’s useful life thru sale or exchange.

CHARACTERISTICS
 Used in business: production or supply of goods, services, for rental, etc.
 Tangible and used beyond one year
 Examples:
o Land and land improvements, Building, Machinery, Motor Vehicle

RECOGNITION
An item of PPE shall be recognized as an asset when:
 Flow of future economic benefits is probable
 Measurable
 At COST, directly attributable costs (Cost Principle)
o Elements of cost
 Purchase price plus import duties, nonrefundable purchase
taxes less trade discounts and rebates
 Installation and handling fees
 Costs of dismantling, removing and restoring

MEASUREMENT
INITIAL MEASUREMENT
A. Monetary
Cash basis On Account On Installment
 Cash Price  Invoice price less  Cash Price
 Plus, directly discount  Difference between
attributable cost  Regardless of the installment price
 Freight discount availment and cash price is
 Installation recorded as an
 Handling Interest, amortized
 Other necessary cost over the installment
period.

B. Non-monetary
Share Capital Bonds Payable Other Asset
 Fair value of  Fair value of Bonds  Fair value of asset given
consideration received Payable PLUS any cash payment
 If not available  If not available  At Carrying amount
 Fair value of share  Fair value of asset
capital received
 Par value or stated  Face amount of
value of share capital bonds payable

C. Construction
 Same principles as for acquired asset
 At cost plus directly attributable cost
 Direct cost of materials and labor
 Traceable indirect cost and incremental overhead
 Abnormal wastage on material, labor or overhead is not included in the cost
of the asset.
2

Illustration 1:
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An entity acquired Land and Building with a cash price of 7,500,000. The property had a
2,500,000 mortgage attached at the time of purchase.

CFAS MODULE BY ECP | Finals Part I

Required: Compute for the total capitalized cost of the land and building.

Case 1: Paid Cash for 7,500,000 and assumed the mortgage payable. For realty tax
purposes, the property is assessed at P9,600,000, 60% of which is allocated to
building.

Land ((7.5M+2.5M) x 40%)) 4,000,000

Building ((7.5M+2.5M) x 60%)) 6,000,000
Total capitalized cost P10,000,000
=========
Case 2: Paid a cash for 5,000,000 and issued a 3,000,000 note payable in three annual
payments of 1,000,000 beginning the end of the current year. The entity did
not assume payment of the mortgage.

The land had an appraised value of 2,450,000 and the building had appraised
value of 4,550,000.

Land (7.5M x 35%) 2,625,000

Building (7.5M x 65%) 4,875,000
Total capitalized cost P7,500,000
=========
Case 3: Issued 100,000 shares with P100 par value in payment for the cash price and
mortgage due on the fixed asset. The market price at the time was P120 per
share.

Total Capitalized cost (100,000 shares X 120/sh) P12,000,000

=========
Case 4: Paid cash of 4,000,000 and exchange an agriculture land costing 2,200,000
with fair value of 3,000,000. The entity did not assume payment of the
mortgage.
Cash payment 4,000,000
Fair value of agricultural land exchanged 3,000,000
Total capitalized cost P7,000,000
========
SUBSEQUENT MEASUREMENT
A. Cost Model
 At cost less accumulated depreciation and impairment loss

B. Revaluation Model
 At revalued carrying amount
 Fair value at date of revaluation less subsequent accumulated depreciation
and impairment loss

DERECOGNITION
 Derecognized upon disposal
 Derecognized when no future economic benefits are expected
 Gain or loss on derecognition is included in Revenue as other income or loss
 Computed as:
o Carrying amount of the asset less net disposal proceeds
DEPRECIATION
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*Depreciation will be discussed in detail in Intermediate Account 1.

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 An Expense

CFAS MODULE BY ECP | Finals Part I

  Cost of goods manufactured
 Operating expense
 Basis: Matching principle
 To have each period benefitted bear an equitable share of the asset cost
 Factors of Depreciation
1. Depreciation period
 The useful life of the assets
 Change in useful life is accounted as change in estimate
 Factors affecting useful life
o Usage
o Physical wear and tear
o Obsolescence
o Legal limits
2. Residual Value
 Decrease or increase in value is accounted as change in estimate
3. Depreciable amount
 Depreciation methods
1. Straight line
 Equal distribution of cost over the assets useful life
 Premise: Passage of time
2. Diminishing balance
 Also known as Accelerated Method
o Sum of years’ digits
o Declining-balance
 Premise: producing more output while assets are new
3. Production method
 Expressed as rate per unit of output or per hour of use
 Premise: Usage

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CFAS MODULE BY ECP | Finals Part I

Name Score
Module topic Yr./Section

TRY THIS:
 Activity I.1: Review of learning objective.
1. Refer to Illustration 1, Case 1: Assuming the entity did not assume the
mortgage, how much will be the capitalized cost of the building?
2. Refer to Illustration 1, Case 2: How should the difference of 500,000 from the
capitalized cost of 7.5M and the total payment of 8M be accounted for?
3. Refer to Illustration 1, Case 3: Assuming the market price for the shares is not
available, but the appraised value of 9,600,000 for land and building was
ascertained. At what amount should the fixed asset be recognized?
4. Refer to Illustration 1, Case 4: How much is reported as gain or (loss) from the
disposal/ exchange of agricultural land.

 Activity I.2
Identify which of the following are classified as PPE:
1. Condominium units of a real estate company
2. Land held for speculation
3. Computers used in an internet café
4. Office furniture and fixture
5. Issued vehicles to sales agents
6. Trucks of a trucking business
7. Condominium unit used as sales office
8. Patterns, molds and dies
9. Building for lease of a fruit and vegetable dealer
10.Housing units of executive officers, ownership is retained by the company

 Activity I.3
Identify which of the following are capitalized (part of PPE cost) and not (expensed
immediately):
1. Interest on loan to fund the cost of an imported machinery
2. Freight charges of an imported machinery
3. Cost of excess materials from purchasing error
4. Cost of testing whether the asset works correctly
5. Cost of opening a new facility
6. Depreciation of equipment in the construction of a machinery
7. Day to day servicing of equipment and machinery
8. Installation costs of office air conditioning units
9. Cost of training staff on the use of newly installed equipment
10.Cost of major inspection for faults and overhauling that require replacement of
parts
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CFAS MODULE BY ECP | Finals Part I

Title of Module : INTERMEDIATE ACCOUNTING 3
Topic : II. Investment in Associates

LEARNING OBJECTIVE
1. Define associate and significant influence
2. Understand equity method of accounting for share investment
3. Identify circumstances when to use and discontinue use of equity method.

DEFINITION OF TERMS
Associate
An entity over which the investor has significant influence over the investee.

Significant Influence
The power to participate in the financial and operating policy decisions of the associate
but not control or joint control over those policies. The existence of 20% to 50% of the
voting power of the investee, unless otherwise demonstrated that it is not the case.

EQUITY METHOD
Investment in associate is measured using the equity method of accounting,
particularly when the investor has a significant influence over the investee.
Investment in Associate
(Noncurrent asset)
Transactions DR CR
1. Initial investment, at cost xxx
2. Share in profits of investee xxx
3. Share in losses of investee xxx
4. Dividends received from investee xxx
5. Impairment loss xxx
Carrying amount xxx

An investor shall discontinue the use of equity method from the date it ceases to have
significant influence and shall account for the investment as follows:
*The following accounting methods are discussed extensively in Intermediate
Accounting.

1. Fair value method

a. Financial asset at fair value through profit or loss (FVPL).
 Current asset
 Used when investment is either held for trading or not held for trading
 Revalued every end of the accounting period, any unrealized gains or losses
are classified as other income or expense in the income statement.
b. Financial asset at fair value through other comprehensive income (FVOCI).
 Noncurrent asset
 Used when investor irrevocably elected to use FVOCI. Investment will be
considered not held for trading.
 Revalued every end of the accounting period, any unrealized gains or losses
are classified as other comprehensive income or expense in the income
statement.
 Upon derecognition, resulting gains or losses on sale may be transferred to
retained earnings and previous entries on unrealized gains/loss is also
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transferred to retained earnings.

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2. Cost method

CFAS MODULE BY ECP | Finals Part I

  Usually applied with respect to investment in unquoted equity instrument or
nonmarketable equity investment. Asset is recorded at cost.

The fair value of the investment at the date it ceases to be an associate shall be
regarded as the fair value on initial recognition of the financial asset. Any resulting
gains or loss arising from the difference between the carrying amount and the fair
value shall be included in profit or loss.

OTHER MATTERS
 Initial acquisition of investment in associate
1. Excess of cost over carrying amount (Cost > CV)
 Investor pays more or less for an investment than the carrying amount of
underlying net assets
 Overvaluation may be a result of
o Undervaluation of investee’s assets, the excess of cost over carrying
amount is amortized over the remaining life of the depreciable asset,
except when undervaluation is attributable to Land and Inventory. In which
case, the amount is expensed when the land and inventory is sold.
o Goodwill, when investee’s assets are fairly valued, excess is included in the
carrying amount of the investment.
2. Excess of fair value over cost (FV > Cost)
 The excess is an increase in the carrying value of the investment in associate
and investment income.
 Subsequent to acquisition (Discussed in the next topic.)
1. Impairment loss (CV > Recoverable amount)
 From time to time the investment is tested for any impairment losses and
any loss identified is an adjustment to the carrying value of the asset.
 Recoverable amount is the measured as the higher between fair value less
cost of disposal and value in use.

PROBLEM ILLUSTRATION
Illustration 1:
Tamiya Company provided the following chronological transactions:
2020 Jan 1 Purchased 20,000 ordinary shares of an investee for 2,400,000
representing 20% interest. The net assets of the investee are fairly
stated at 8,000,000.
Dec 31 The investee reported net income of 1,500,000 for the year.
Received a 10% share dividend from the investee.
2021 Dec 31 The investee reported net loss of 300,000
The investee paid cash dividend of 500,000 to ordinary shareholders on
December 31, 2021

Required:
1. Compute the implied goodwill
 Compare the acquisition cost against the value of net assets acquired.
Acquisition cost 2,400,000
Net assets acquired
(8,000,000 x 20% interest) (1,600,000)
Goodwill 800,000
========
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2. Prepare the investment in associate ledger for 2020 and 2021 and compute for
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carrying values at December 31, 2020 and December 31, 2021

Investment in Associate

CFAS MODULE BY ECP | Finals Part I

 Date Particulars DR CR
2020
Jan. 1 Purchased 20,000 ordinary shares for 2,400,000
2,400,000, representing 20% interest.
Dec.31 Share in the investee’s income (1.5M x 300,000
20%)
Carrying value, December 31, 2020 2,700,000
2021
Dec.31 Share in investee’s net loss (300,000 x 60,000
20%)
Receipt of cash dividend (500,000 x 20%) 100,000
Carrying value, December 31, 2021 2,540,000

Illustration 2:
Using the same information except that purchased shares represents 40% interest in
the investee’s net assets.

Required:
Compute carrying value of the investment in associate at December 31, 2021.
Net assets purchased (8,000,000 x 40%) 3,200,000
Add/Deduct:
Dec. 31, 2020 share in net income 600,000
Dec. 31, 2021 share in net loss (120,000)
Dec. 31, 2021 cash dividend (200,000)
Carrying value, December 31, 2021 3,480,000
========
Illustration 3:
Using the same information in Illustration 1, Assuming that the purchase represents
25% interest and that the carrying amounts of identifiable assets and liabilities of the
investee were equal to their fair value, except for an equipment whose fair value was
2,000,000 greater that its carrying amount. The Equipment has a remaining life of two
years.

Required:
1. Compute for the Net investment income in 2020.
Share in net income 375,000
Amortization of excess attributable to equipment
((2,000,000 x 25%) / 2yrs) (250,000)
Excess net fair value* (100,000)
Net investment income, December 31, 2020 25,000
=======
*Computation
Acquisition cost 2,400,000
Carrying amount of net assets
(8,000,000 x 25%) 2,000,000
Excess of cost over carrying amount 400,000
Excess attributable to equipment
(2,000,000 x 25%) (500,000)
Excess net fair value over cost (100,000)
========
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Name Score
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Module topic Yr./Section

CFAS MODULE BY ECP | Finals Part I

TRY THIS
 Activity II.1: Review of learning objective.
1. Refer to Illustration 1: Reconstruct the journal entries for the year 2020 and
2021. (Use the ledger to validate your answers)
2. Refer to Illustration 1: How much is reported as investment income for the year
2021? Justify your answer.
3. Refer to Illustration 2: How much is the total investment income recognized for
the year ending December 31, 2020?
4. Refer to Illustration 3: Compute for the carrying value of investment in
associate at December 31, 2021.

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CFAS MODULE BY ECP | Finals Part I

Title of Module : INTERMEDIATE ACCOUNTING 3
Topic : III. Impairment of Assets

LEARNING OBJECTIVE
1. Know the basic principles for recognition of impairment
2. Understand the concept of fair value less cost of disposal and value in use
3. Know the measurement of recoverable amount
4. Understand the concept of cash generating unit

DEFINITION OF TERMS
Cash Generating Unit
The smallest identifiable group of assets that generate cash inflows from continuing use
that are largely independent of the cash inflows from other asset or group of assets.

Cost of Disposal
An incremental cost directly attributable to the disposal of an asset, excluding finance
cost and income tax expense.

Impairment
The fall in market value of an asset so that the recoverable amount is now less than the
carrying amount in the statement of financial position.

Value in use
The present value or discounted value of future net cash flows expected to be derived
from an asset.

ACCOUNTING FOR IMPAIREMENT

The principle of conservatism states that assets and revenues are intentionally
reported at figures potentially understated and where there is uncertainty about
incurring loss, conservatism encourages recording and amplifying its potential impact.
Thus, assets are tested for any impairment losses at each reporting date.

Accounting issues:
o Indication of possible impairment
 External sources
o Decrease or decline in market values: passage of time, normal use, new
competitor
o Change in technological, market, legal or economic environment
o Increase in interest rate or market rate of return on investment
o Carrying amount is more than the market capitalization / net assets
 Internal sources
o Evidence of obsolescence/wear and tear
o Change in manner or extent to which asset is used: from operating assets to
being abandoned, etc.
o Evidence of assets worsening economic performance
o Measurement of the recoverable amount
 Refer to PPE for recoverable amount definition.
 Calculation of value in use and fair value hierarchy.
10

o Recognition of impairment loss

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 Recognized when carrying value is more than the recoverable amount.

CFAS MODULE BY ECP | Finals Part I

 Pro-forma entry: Impairment loss XXX
Accumulated depreciation XXX
 The impairment loss is recognized in profit or loss and presented separately in
the income statement

Illustration 1:
At year end December 31, 2018, Bee Co has an equipment with the following cost
and accumulated depreciation:
Equipment 10,000,000
Accumulated depreciation 4,000,000

The entity found the equipment impaired due to obsolescence and physical
damage. The following information is available at year end relative to the
equipment:
Fair value less cost of disposal 4,500,000
Value in use or discounted cash inflows 4,000,000

Required: Compute for the impairment loss.

1. Compute for carrying value prior to recognition of impairment loss
o Equipment, cost - Accumulated depreciation = CV
o 9,000,000 – 3,000,000 = 6,000,000
2. Compute or identify the recoverable amount
o Higher of fair value less cost of disposal and value in use
o 4,500,000 > 4,0000, Recoverable amount: 4,500,000
3. Compare the carrying value and recoverable amount, asset is measured at
lower value
o 6,000,000 > 4,500,000, Year-end adjusted carrying value: 4,500,000
o 4,500,000 – 6,000,000 = 1,500,000 Impairment loss

o Reversal of an impairment loss

 Impairment loss is reversed if the recoverable amount previously impaired turns
out to be higher than the current carrying amount.
 The new carrying amount shall be increased to new recoverable amount up to
originally calculated carrying amount should the asset have not been impaired.
 Gain on reversal of impairment loss is recognized immediately in the income
statement, the amount of which should not exceed the previously recognized
impairment loss. Where reversal is higher than the impairment loss recorded,
excess shall be credited to revaluation surplus.

Illustration 2:
Using the same information in Illustration 1: On December 31, 2019 the entity
determined that the fair value less cost of disposal of the impaired equipment had
increased to 5,500,000. The equipment has a useful life of ten years and was
purchased in January 1, 2015.

Required: Compute for the gain on reversal or impairment loss.

1. Compute for the “would have been” carrying value, assume that there was no
recognized impairment loss.
o Cost – Accumulated depreciation = CV, no impairment
o 10,000,000 – (10,000,000 x 5yrs/10yrs) = 5,000,000
11

a.
2. Compare the new fair value less cost of disposal and CV with no impairment,
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standard dictates that reversal should not exceed the “would have been” CV
had impairment loss not recognized.

CFAS MODULE BY ECP | Finals Part I

 o 5,500,000 > 5,000,000, CV at December 31, 2019: 5,000,000
3. Compute for the CV with impairment
o Equipment, cost 10,000,000
Accumulated Depreciation
(4,000,000 + 1,500,000*) (5,500,000)
Adjusted CV, Dec. 31, 2018 4,500,000
Depreciation, 2019
(4,500/6yrs) (750,000)
Carrying value, Dec. 31, 2019 unadjusted 3,750,000
=========
*The impairment loss recognized in 2018.
4. Compare the CV without impairment and CV with impairment.
o 5,000,000 > 3,750,000, CV at December 31, 2019: 5,000,000
o 5,000,000 – 3,750,000 = 1,250,000, Gain on reversal 1,250,000

CASH GENERATING UNIT (CGU)

A segment of business that generated revenues and cash inflows independently. It may
be a department or product line.

In general, recoverable amount of an asset shall be determined individually, however if

not possible, it shall be determined as to which the asset belongs to.

Accounting for Impairment loss of CGU

a. First, loss shall be allocated to goodwill, if any.
b. Then, to all other noncash assets, prorata based on their carrying amount.

 Reversal of impairment loss recognized on goodwill is explicitly disallowed by the

standard.

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CFAS MODULE BY ECP | Finals Part I

Name Score
Module topic Yr./Section

TRY THIS
 Activity III.1: Review of learning objectives.
 Refer to Illustration 1: What is the equipment’s net book value reported on the
face of the financial position at December 31, 2018?
 Refer to Illustration 1: What is the effect of the recognition of impairment loss
on accumulated depreciation and on income for the period?
 Refer to Illustration 2: Compute for the balance of accumulated depreciation at
December 31, 2019. What did you notice?
 Refer to Illustration 2: Assuming the fair value less cost of disposal on
December 31, 2019 was 4,800,000. How much is the gain on reversal of
impairment loss?

 Activity III.2: Problem

Gee Company determined that due to obsolescence, an equipment with an
original cost of 4,500,000 and accumulated depreciation on January 1, 2017 of
2,100,00 had suffered a permanent impairment and as a result should have a
recoverable amount of only 1,500,000 as of the beginning of the year. The
equipment has a remaining useful life of three years.

Required: Compute for the impairment loss on January 1, 2017 and carrying value
of the equipment on December 31, 2017.

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CFAS MODULE BY ECP | Finals Part I